Publication Date


Document Type


First Advisor

Miller, Robert E. (Professor of finance)

Degree Name

B.S. (Bachelor of Science)

Legacy Department

Department of Finance


This report analyses the venture capital industry and the role venture capitalists play in initial public offerings (IPO). Venture capitalists invest in the private equity market. They provide financial support and professional expertise in exchange for equity of their portfolio companies. These companies have attractive growth potential, but lack access to typical sources of external financing such as public securities markets or credit markets. With its history tracing back to the Middle Ages, the venture capital industry has expanded most rapidly during the post-World War II Era. Prior to this time, wealthy individuals were the main source of investment capital; however, the industry is now characterized by more institutional investors such as pension funds. The industry is organized by four different types of venture capital firms: corporate industrial groups, independent private capital firms, venture capital subsidiaries of financial corporations, and small business investment companies (SBIC). Typical sources of venture capital are pension funds, insurance companies, endowments, and corporate and foreign investors. There are specific geographic concentrations for capital commitments and disbursements. Venture capitalists, focusing on high growth industries, typically hold their investment for five to ten years. During this time, they often provide multiple rounds of financing to their portfolio company and actively monitor its business operations. As the portfolio company progresses through the various stages of the business development process, the risk level of the investment decreases. Since industry returns vary from period to period, experts believe the venture capital industry is cyclical. The second objective of this report is to determine the role of the venture capitalist in the IPO process. An IPO is the first issuance of public securities by a company. Typically, the IPO results in large positive returns in the first day of public trading. Many underpricing theories are examined in this report to explain the large initial returns. The IPO is a very popular exit strategy for venture capitalists. It allows them to liquidate their equity holding and realize a return on investment. In order to understand the relationship between the venture capital industry and the IPO process, I recorded the stock characteristics and tracked the performance of almost every venture-backed IPO of 1992. I collected 20 days of closing prices for 147 individual securities and the market index. With this data, I calculated the daily returns and used regression analysis to explain the role venture capitalists play in the IPO process.


32 pages




Northern Illinois University

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